Here’s a festive scene for you. I’m in John Lewis in Edinburgh. I’m leaving the cookery department and heading, via the escalators, for the toy department to have a go at elbowing the other middle-class mummies out of the way to get to the special edition orange micro-scooters, when I overhear a snatch of conversation behind me.
“It’s copper,” says a voice. “You can get a lot more for it than you used to.”
I start eavesdropping. Turns out that the young couple behind me have a technically unemployed friend who makes more money than they do by spending his days digging around in skips for bits of discarded metal which he then sells by weight to the “scrappies”.
The couple don’t fancy the work themselves but they are impressed with the tax-free cash flow their mate brings in. I am too – although I don’t really approve of the tax-free bit. I am not averse to a bit of skip-searching myself; most of the fuel for our woodburning stove comes from the ones I pass on my school run. But it hadn’t actually occurred to me to nick metal as well. I’m generally more of an exchange-traded fund person when it comes to rising commodities.
However, the exchange did remind me that the commodities trade isn’t exactly a contrarian one anymore. When I started suggesting that readers bought into the likes of cotton and coffee a decade ago it was a pretty odd thing to do. By 2007 it was both very profitable and verging on mainstream. And now, after the nasty hiccup of the credit collapse in 2008, commodities are considered a core part of portfolios. Barclays Capital reports that total investor holdings are now at a record high. Prices are up 20% since August with copper (which I suggested you look at a few months ago) continually hitting new highs, and the oil price back above £90 a barrel.
The price of lamb in the UK – which even in the boom of 2007 seemed as if it would never budge – has finally started to soar too; so much so that farmers are reporting regularly losing sheep to rustlers who pull over with a couple of working dogs, load the animals into vans and scarper.
If you don’t already have commodities in your portfolio, you can’t ignore this. You also can’t ignore the main driver of all this – quantitative easing (QE). Ben Bernanke’s plan when he introduced his second round of QE (QEII) was for new money to pour into bank lending in the US and to support house prices and employment. So far, that hasn’t happened. Instead, the money is pushing up asset prices, particularly those of commodities, across the board.
So, what do you do to take advantage of this?
First, what you shouldn’t do: buy commodities (gold excepted) for the long term. Do so, says Société Générale’s Dylan Grice, and you are not just buying commodities, you are “selling human ingenuity”. What he means is that commodities aren’t productive assets in themselves. They are simply lumps of stuff that in general become cheaper to produce over time thanks to the fact that “human ingenuity has a good track record of overcoming nature’s constraints”. Look at it like that and a commodity bull market is really just a “bottleneck”. So instead of betting against ingenuity we should be betting on it, by buying into the companies whose job it is to figure out how to get rid of the bottlenecks – deep-sea drillers or fertiliser companies, perhaps.
I’m totally with Grice on this one. But what about the shorter term? We are undoubtedly in the early stages of some sort of economic recovery and commodity prices tend to rise at this point in the cycle, but right now it isn’t just the demand associated with growth pushing up prices; it is fear too. If you were an ordinary person in, say, China or the UK, you were seeing your cash lose purchasing power every day, and you knew that thanks to QE it would probably continue to do so, what might you do? At one end of the spectrum it would be sheep rustling or skip-diving for scraps of lead. At the other, you would look to protect yourself by buying real assets.
That’s a large part of the reason commodity prices have risen this year, and why they probably will next year too.
• This article was first published in the Financial Times